The Effect of Retained Earnings on Financial Intermediation of Deposit Taking Saccos in Kenya

This study examined the effect of retained earnings on the financial intermediation of deposit-taking Savings and Credit Cooperative Societies (SACCOs) in Kenya. Financial intermediation, measured by the loan-to-deposit ratio, is critical for mobilizing savings and providing affordable credit to underserved households and small enterprises. Using a causal–explanatory longitudinal design, the study analyzed panel data from 130 licensed DT-SACCOs over the period 2019–2024, with retained earnings as the explanatory variable. Descriptive statistics revealed considerable variation in retained earnings and intermediation efficiency across SACCOs, with a positive correlation (r = 0.622) between retained earnings and lending capacity. Random Effects Generalized Least Squares (RE-GLS) regression results indicated that retained earnings had a significant positive effect on financial intermediation (β1 = 0.499, p < 0.05), implying that internally generated funds enhance liquidity, capital adequacy, and loan provision. The findings highlight that surplus retention is more effective than reliance on short-term debt in sustaining lending operations. Policy implications include encouraging SACCOs to adopt surplus retention strategies and for regulators to promote internal capitalization to strengthen institutional resilience and improve intermediation efficiency.